The agreement starts with movies released in 2016, the
companies said today in a statement, without disclosing terms.
Netflix will replace Liberty Media Corp. (LMCA)’s Starz Entertainment
when its output deal with Disney expires in 2015. Netflix surged
the most since January while Liberty Class A tumbled.

The deal is a coup for Netflix Chief Executive Officer Reed Hastings, who faces emerging competition in online video and
pressure for a sale of the company from activist investor Carl Icahn. U.S. subscribers of Netflix will get access to movies
from Disney, including its Pixar and Marvel releases, as soon as
seven months after they open in theaters, a time frame
traditionally reserved for premium pay-TV channels like Starz.

“It was a long slog, but ultimately we displayed enough
sustainability that Netflix became a real and viable option for
the pay-TV window,” Ted Sarandos, the video service’s chief
content officer, said in an interview.

Netflix, based in Los Gatos, California, surged 14 percent
to $86.65 at the close in New York, more than doubling its year-
to-date gain. Liberty Media, based in Englewood, Colorado, slid
4.9 percent, the most since May 17, to $105.56. Disney, the
world’s biggest entertainment company, was little changed at
$49.30.

Seeking Sony

The Disney accord separately gives Netflix immediate access
to older classics such as “Dumbo,” and new direct-to-video
releases in 2013. The company doesn’t gain movies from “Star
Wars” creator Lucasfilm Ltd., which Disney is buying for $4.05
billion and doesn’t yet own, according to Jonathan Friedland, a
Netflix spokesman. He declined to say whether they would be
included later.

For Netflix, with 30 million users worldwide, the Disney
agreement extends its lead over competing video services from
Amazon.com and Verizon Communications Inc. (VZ) and Coinstar Inc. (CSTR)’s
Redbox Instant, which is set to begin public testing this month.
Netflix is adding exclusive programs such as “Lilyhammer” and
“House of Cards” as it seeks earlier and fuller home-video
access to studio movies for its customers.

“This is a big win for Netflix,” Jaison Blair, an analyst
with Telsey Advisory Group in New York, said in a telephone
interview.

Movies’ Cost

Netflix probably agreed to pay in excess of $350 million a
year for Disney’s movies, estimates Tony Wible, an analyst with
Janney Montgomery Scott in Philadelphia.

Disney embraced online media sooner than its competitors,
becoming the first major studio to sell and rent TV shows and
movies through Apple Inc. (AAPL)’s iTunes. The company’s largest
shareholder is the trust of late Apple co-founder Steve Jobs.

Netflix beat out several bidders for the Disney pictures,
Sarandos said, without identifying them. The company will bid
aggressively for exclusive rights to Sony Corp. (6758) films when that
studio’s contract with Starz ends around 2016, he said.

Paula Askanas, a Sony spokeswoman, said the company had no
comment on Sarandos’s remarks.

Children’s Tales

With a Disney catalog largely geared to children and
families, Netflix can build a solid base of subscribers who are
less likely to cancel service for competing offerings, said
Scott Devitt, a Morgan Stanley analyst who has a buy rating on
the shares.

“In a shrewd move by Netflix, the company is focusing on
building a highly differentiated content catalog aimed at kids,
which is a demographic that has relatively homogeneous tastes,”
Devitt wrote in a research note.

While Netflix bolsters its film lineup, the announcement
doesn’t settle a tug-of-war among investors over the company’s
prospects, said Arvind Bhatia, a Sterne Agee & Leach analyst who
has a neutral rating on the shares.

With about $4.5 billion in streaming content obligations
due before the Disney films are available, and the losses
incurred as it expands internationally, Netflix must increase
its subscriber count or raise its $7.99-a-month price for
unlimited viewing to remain viable long-term, Bhatia said.

“It’s a big get, but clearly there are several unknowns
out there to determine if it’s a good get,” Bhatia said.
“Though we don’t know the financial terms, it’s clear this was
not a cheap deal.”

Netflix expects billionaire Icahn, who controls almost 10
percent of the company through stock and options, to start a
proxy battle as he seeks a sale, Hastings said last month.

In 2010, Disney extended its digital distribution deal with
Starz through 2015. Today’s agreement will replace that pact
when the latter expires.